1.  Today, there is a massive opportunity—and need for investment– to scale EO in the United States. Project Equity estimates that 2.9 million businesses in the United States will need new owners or will risk closure, often referred to as the “silver tsunami.” Ownership Capital Lab calculates that if just 10% of silver tsunami businesses with more than 10 employees were to transition to employee ownership, then EO could help over 8.2 million Americans build wealth. The potential for scale is staggering, but EO needs significant capital to achieve this type of scale, and this is where foundations and impact investors can play an important role.

2.  Employee-owned companies historically outperform their peers and pay back their debt, making employee ownership attractive to impact investors. The National Center for Employee Ownership has conducted multiple studies showing that employee-owned firms are more resilient, have fewer layoffs, fewer wage reductions, and higher worker retention. On average, employee owners earn 33% higher wages, hold 92% greater household net worth, and stay in their jobs 53% longer than peers at non-employee-owned companies. These firms also have very low default rates on ESOP (employee stock ownership plan) loans. Unsurprisingly, companies that have a highly engaged workforce pay back their loans. Taken together, the evidence shows that employee ownership builds a highly engaged workforce with a strong sense of belonging, making EO companies a smart and reliable bet for impact investors.

3.  A significant barrier to scaling EO is that most business owners and advisors simply don’t know it exists. ESOP practitioners and nonprofit organizations working on ownership transitions often focus on marketing EO to selling owners, demonstrating how it can compete with private equity (PE) buyers. Foundations can play a critical role in advancing this work—both by funding awareness campaigns that educate service providers and investors and by leveraging their social capital to publicly endorse EO, convene peers, and mobilize additional capital to the field.

4.  Personal guarantees represent another major barrier in the EO space because most bank lending requires them. The question becomes: which potential new employee-owner will sign the personal guarantee on behalf of the entire owner group, so that the company can get the financing it needs to transition? In some cases, the selling owner is asked to stay on as a guarantor during the transition, an obligation that can be overwhelming, especially since guarantees are often required not only for transaction financing but also for working capital, lines of credit, leases, etc. The Small Business Administration (SBA) opened its 7(a) loan guarantees program for majority ESOPs, which provides a solution for only a small portion of the 7(a) guarantee-eligible part of the market, since it supports loans up to $5M. The non-ESOP forms of employee ownership are more likely to be of the size that would be able to take advantage of this loan size, but the guarantee isn’t currently available beyond ESOPs. Philanthropy can play an important role here with impact-first capital. For example, foundations could deploy PRIs or other forms of catalytic capital to set up a pooled guarantee fund that would unlock financing for EO transitions.

5.  EO funds urgently need capital to compete with private equity. It’s important that EO is able to compete with private equity since PE is motivated by making companies more profitable whereas EO supports workers’ livelihoods and quality jobs. Ownership Capital Lab estimates that while private equity controls $3.6 trillion in buyout capital, EO has access to only about $500 million, which translates to .0139% of private equity assets under management. Ownership Capital Lab and Transform Finance also surveyed EO fund managers and found that 90% of managers identified lack of capital as the most important factor limiting the growth of EO. Pipeline can be a constraint, but with greater capital, fund managers would have the increased capacity to develop stronger deal flow. To close this gap, a full range of philanthropic capital is needed, including grants, PRIs/catalytic investments, guarantees, and market-rate investments. For example, foundations can use grant dollars to enable the expansion of EO and support EO field building, technical assistance, emerging fund managers, and policy advocacy efforts. This is critical for building out the EO nonprofit ecosystem and also supporting emerging funds that do not have a track record. PRI/catalytic capital can support emerging EO fund managers, serve as first-loss capital, attract other investors, and finance start-ups and EO transitions. As mentioned above, personal guarantees are a huge issue when it comes to scaling EO, and catalytic capital could also backstop personal guarantee requirements through dedicated guarantee funds. For EO to scale, funders must use every tool in their toolbox and be strategic about deploying grant and investment capital together to have the greatest impact.